What is the Difference Between Asset Backed Securities and Mortgage Backed Securities?

Asset-backed securities (ABS) and mortgage-backed securities (MBS) are both types of investments where securities are pooled and sold to a group of investors. They are similar in structure but have some key differences:

1. Underlying Assets: ABS are backed by various types of loans, receivables, and leases, while MBS are collateralized by mortgages.
2. Diversity of Collateral: Unlike MBS, which are backed by mortgages only, ABS can be backed by a range of assets, such as credit card receivables, home equity loans, student loans, and auto loans.
3. Seller Types: Mortgage-backed securities are often sold by borrowers to investors, whereas lenders typically sell asset-backed securities to investors.
4. Issuers: Most MBS are issued by government-sponsored enterprises like Ginnie Mae, Fannie Mae, or Freddie Mac, which are all U.S. government-sponsored enterprises. In contrast, ABS are issued by various financial institutions that pool assets together to create the securities.
5. Development: ABS are relatively new compared to MBS, which have well-established markets.
6. Duration and Risk: ABS are typically shorter in duration and more challenging when it comes to risk management, while MBS are comparatively less risky due to their longer time frame.

In summary, the main difference between ABS and MBS is the underlying assets that back them. ABS are backed by various types of loans, receivables, and leases, while MBS are backed by mortgages. Other differences include the diversity of collateral, seller types, issuers, development, and duration and risk.

Comparative Table: Asset Backed Securities vs Mortgage Backed Securities

The main difference between Asset-Backed Securities (ABS) and Mortgage-Backed Securities (MBS) lies in the underlying assets that back them. Here is a table comparing the two:

In summary, ABS are backed by a diverse range of non-mortgage assets, while MBS are backed exclusively by mortgages. ABS can be issued by various entities, including governments and businesses, and generally do not have government backing. In contrast, MBS are often issued by government-sponsored enterprises, which provide government backing.